IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF UTAH, CENTRAL DIVISION
C O P Y
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)
THE SCO GROUP, )
Plaintiff, )
vs. ) Case 2:04-CV-139
)
NOVELL, INC., )
Defendant. )
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BEFORE THE HONORABLE DALE A. KIMBALL
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MAY 11, 2004
REPORTER'S TRANSCRIPT OF PROCEEDINGS
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MOTION HEARING
Reported by: KELLY BROWN, HICKEN CSR, RPR, RMR
A P P E A R A N C E S
FOR THE PLAINTIFFS: HATCH, JAMES &DODGE
BY: BRENT O. HATCH
MARK R. CLEMENTS
Attorney at Law
10 West Broadway, Suite 400
Salt Lake City, Utah 84101
RYAN E. TIBBITS
SCO GROUP
Attorney at Law
335 South 520 West, 100
Lindon, Utah 84042
FOR THE DEFENDANT: MORRISON & FOERSTER
BY: MICHAEL A. JACOBS
Attorney at Law
425 Market Street
San Francisco, CA 94105-2482
ANDERSON & KARRENBURG
BY: JOHN P. MULLEN
Attorney at Law
50 West Broadway, Suite 700
Salt Lake City, Utah 84101
SALT LAKE CITY, UTAH, TUESDAY, MAY 11, 2004
* * * * *
THE COURT: We're here this afternoon in the matter of
the SCO Group, Inc., vs. Novell, Inc., 2: 04-CV-139. For
plaintiff, Mr. Brent Hatch, Mr. Mark Clements, Mr. Ryan
Tibbits. For the defendant, Mr. Michael Jacobs.
MR. JACOBS: Good afternoon, Your Honor.
THE COURT: Good afternoon. And Mr. John Mullen.
MR. MULLEN: Good afternoon, Your Honor.
THE COURT: Good afternoon.
We have two motions, plaintiff's motion to remand
and defendant's motion to dismiss. Let's hear the motion to
remand first. Who's going to argue it?
MR. HATCH: I am, Your Honor.
THE COURT: Mr. Hatch.
Who's going to argue for the defendant on remand?
MR. JACOBS: I am.
THE COURT: That would be Mr. Jacobs; right?
MR. JACOBS: Right.
THE COURT: Go ahead, Mr. Hatch, on the motion to
remand.
MR. HATCH: Thank you, Your Honor.
Your Honor, as you know, Novell, being a party who
removed this action from the state court, carries the burden,
and any ambiguities should be resolved against removal in this
case. What this really comes down to is, Your Honor, we
brought a state court action seeking state court remedies in
state court.
THE COURT: Slander of title.
MR. HATCH: Slander of title. And the complaint, unlike
many of the cases cited by Novell, does not allege federal
question, does not allege or seek a federal remedy. SCO as --
THE COURT: Can you get to your title claim without
somehow deciding something about 204(a)?
MR. HATCH: I think so, Your Honor. I think what's
happened here is Novell to a large part has put form over
substance here. Section 204(a), as Your Honor is well aware
now having read the briefs, that requires a writing. And
that's it. There isn't a lot more there. There isn't a set
of standards for a court to apply, like Novell seems to imply
that there's something more there. They call it, there needs
to be a contract of conveyance or what have not.
We clearly allege that there is an agreement by
which these copyrights were transferred. It is a writing, and
prima facie meets the requirements of 204(a). The kind of
argument that they're making here is that there needs to be
something more has been really routinely objected to by the
courts. And I think if we just get to the nub of the matter,
essentially what they are relying on here is some -- a ruling
in Jasper. The reality here is the type of argument they're
making that somehow if you have to get to the underlying
argument about what the contract means and what it is, which
are frankly all state law questions, it will turn every single
contract case that even tangentially mentions a copyright or
trademark into a federal question.
And that's been pretty routinely rejected by all
the courts. As a matter of fact, Judge Friendly, a fine judge
out of the Second Circuit that we read over and over and over
again in law school made that very clear in the TB Harms
decision. He said we can't put form over substance. If we do
the kind of things that Novell is asking to do here, we're
going to always have a federal question.
And the reality is 204(a) doesn't apply standards.
It makes it very clear that you have to have it in writing.
Particularly what they're worried about, and this comes out in
the cases, is that somebody loses a copyright because of
someone coming later and saying, we have had some type of oral
agreement. It really creates a distinction between oral and
written agreements, so there is something concrete to go on.
It doesn't go to the underlying, what does the written
agreement say.
And that's, frankly, where Novell makes its
mistake, in my view, on the law because the cases it cites,
virtually every one of them, are -- where they're saying
there's a 204, a real 204 issue, they were oral agreements.
Now, really what it gets us down to, as I say
again, is the Jasper case.
THE COURT: The Second Circuit case Jasper?
MR. HATCH: Correct, Your Honor. 2002.
THE COURT: 2002.
MR. HATCH: And I think the decision, because they rely
on it so heavily, if you look at TB Harms, you look at
virtually every other decision, and it's really clear that all
we're looking for is a written agreement, and we have that
here. And at this stage of the game it shouldn't be going any
further than that.
What it really comes down to is if the Court is
going to rely on Jasper. Does Jasper give the Court anything
to chew on? And Jasper really does an interesting thing, Your
Honor. It goes through the law. And I think it states it
pretty well. They say -- and they go right to Judge Friendly,
as I did. And they say:
Judge Friendly pointed out the fact that a case
concerns copyright does not necessarily mean that it
is within the jurisdiction of the Federal District
Court.
Well, that's good law. I think that's still in
place, and I think almost every court follows that. And just
right below that in the decision, he says:
Specifically, if the case concerns a dispute as to
ownership of copyright --
Which is exactly what we have here. And the issue
-- which I point out is raised by the defense. It's not
raised in the initial pleadings.
Specifically, if the case concerns a dispute as to
ownership of copyright, then the issue of ownership
turns on the interpretation of a contract, the case
presents only a state law issue. And unless the
complaint asserts a remedy expressedly granted by
the Copyright Act, federal jurisdiction is lacking
in the absence of diversity jurisdiction.
And then he makes the point that I just made a few
--
THE COURT: There's no claim that there's any diversity
here, is there?
MR. HATCH: No. Both companies are Delaware
corporations, so it could not be removed on a diversity basis.
So they're relying --
THE COURT: So it's federal jurisdiction or no
jurisdiction.
MR. HATCH: That's exactly right Your Honor.
And Judge Friendly found and so did Judge Newman
here in the Jasper case and says:
The difficulty that is almost every case involving
contract interpretation, appropriate for state court
determination, could be recharacterized as a case
appropriate for a federal court simply by framing
the issue to be whether the disputed contract
qualified as a writing within the meaning of Section
204(a). In most cases, there will be no doubt that
the contract is a Section 204(a) writing, and the
only substantial issue can be contract
interpretation.
THE COURT: Except Jasper was not one of those cases.
MR. HATCH: It was not.
THE COURT: How is your case different than Jasper?
MR. HATCH: Well, I would urge the Court to look very
close to Jasper because the Court there made it very clear
that it is the rare exception to the rule. And I would report
to the court that Jasper -- and in their briefs Novell says it
is a leading case in its area. I would agree it's a leading
case in the area, but on a very different point than they do.
I think it's a leading case in the area of the following.
In Jasper, the plaintiff himself brought his case
in federal court, unlike us. He claimed that his case was one
that fell under federal copyright laws, the plaintiff himself.
Again, unlike our case. The defense in that case never raised
an issue as to whether or not subject matter jurisdiction
properly was laid in the federal court.
THE COURT: The ultimate question, though, is still the
same, isn't it? Is there appropriate federal jurisdiction?
MR. HATCH: Exactly. Eventually what happened here, the
case went to a bench trial, and the plaintiff lost. In other
words, it was found that he didn't have a case. And this
matter for the first time on jurisdiction was raised on
appeal. And it really doesn't take a lot to read why the
court found this a rare exception.
Now, in our brief we point out one of the reasons
here is because there were third parties involved and there
had to be some clarification as to the copyright. But the
reality is they cite the law, which would apply directly here,
and say this is the rare case because it's pretty clear the
Court said, you had your day in court. You wasted all of our
time. This is a rare case.
And what goes to show that even more --
THE COURT: You're saying that more normally the
jurisdiction question would have been raised and decided much
earlier.
MR. HATCH: Oh, sure.
THE COURT: Theoretically, it shouldn't make any
difference, I guess.
MR. HATCH: Correct. And if you notice, Judge Friendly
does the same kind of thing. If you look at the TB Harms
decision, it's kind of interesting. He pointed out there were
other cases that were like that where people miss it. And
frankly, I guess in some people's minds, they don't look at
those issues. And Your Honor is absolutely right. Subject
matter jurisdiction can be raised at any time.
And Judge Friendly was called to deal with the
Rossiter case and also the Venus Music cases, that somehow
they went forward even though there wasn't -- in his mind it
was pretty clear you can read between the lines there wasn't
subject matter jurisdiction. And he said kind of the same
thing I said here. It was kind of bad facts making bad law.
He said:
But the jurisdictional problem, that was obscured by
the insistence of both parties that this action as a
copyright infringement.
In other words, the district court missed it
because nobody raised it, and the district court didn't catch
it himself.
Here, we don't have that instance. It's not one of
those rare instances. This is one of those cases where it's
pretty clear there was a writing, and this is an argument that
is being made purely for the purposes of shopping for federal
court jurisdiction.
I think one of the things it points out most
clearly is the Jasper court laid out kind of parameters, and
the parameters were if it's contract interpretation, that's
all it is. If there is an actual writing and all you're doing
is interpreting it, that's a state law question. And that's
exactly our case here.
What Jasper doesn't do, and if it's really a
leading case on exceptions, where's the standard, Your Honor?
You know, if you're trying to put this in a case book for law
students to study or better yet, be in the case law so you and
I can understand, what's the rare exception? How do we apply
it? There's no standards really enunciated here. And I think
it's really a rare exception in the sense that this Court
wasn't about to let the plaintiffs in that case after having
gone clear to trial and getting a judgment, then being the one
to take advantage and say, never mind. Gee, we want to take a
second bite in state court. And since they had brought their
case under federal law, I think the Court allowed it to be --
die its intermediate death under federal law.
Simply put, the 204(a) is the same. It doesn't
apply any standards at all. Just like Jasper, its only
requirement is there be a writing. And I don't think there
can be really honest dispute that there is a writing here.
Now, Novell is trying to make what we believe are
very convoluted arguments that there may be some issue as to
what the writing meant. But isn't that really the gravamen of
any contract claim that is decided in state court where
there's a dispute between the parties? And I don't think that
in and of itself makes it a federal claim.
So, Your Honor, as much as we'd like to be here --
THE COURT: I can tell.
MR. HATCH: And in reality, I think we would. But the
difference is I think we have to raise this because we don't
want to be put in a position where one or the other parties
having received a bad ruling at the end of the matter then
says, wait a minute --
THE COURT: No jurisdiction.
MR. HATCH: -- no jurisdiction, for the exact reason Your
Honor raised, and that's the kind of thought process we went
through. We'd rather be here. But the bottom line is it
can't be waived, and so -- and it can can be raised at any
time. And we don't want to have to go through the time and
expense of getting really quite far down the road when we want
to be able to see this through as quickly as possible and have
somebody who doesn't think the litigation is going
particularly well say, oh, wait a minute, we just discovered
there isn't subject matter jurisdiction here. Because, gosh,
that is a writing. And since it's a writing and we are
interpreting the contract, we really ought to be in state
court.
That ought to happen now, not later.
Thank you, Your Honor.
THE COURT: Thank you, Mr. Hatch.
Mr. Jacobs? You have a somewhat different view in
this matter.
MR. JACOBS: Indeed, Your Honor. Good afternoon.
Your Honor, I think SCO's argument understates the
significance of Section 204(a) and understates the
significance of this dispute. And what I'd like to do is walk
you through the structure of the relevant provisions of the
Copyright Act so you can see how 204(a) sits in context.
Where I'm going is this.
THE COURT: You would agree, before you go wherever
you're going, you would agree it's your burden to establish --
you're the removing defendant. It's your burden to establish
federal jurisdiction because you removed and claimed it.
MR. JACOBS: That's correct, Your Honor.
THE COURT: And the standard is preponderance.
MR. JACOBS: Well, I don't know that there is a
preponderance standard. I think the standard is --
THE COURT: What do you think it is if it isn't
preponderance?
MR. JACOBS: I think the question -- the standard is
whether applying Jasper -- whether there's a substantial 204(a)
issue raised by the complaint. And I'll come to the issue of
boundaries so that we see that isn't infinitely elastic.
THE COURT: Okay.
MR. JACOBS: 204 is in the Copyright Act around some
other sections that make clear that the Copyright Act is going
to supplant state law when it comes to the question of
transfers of copyright interests. Section 201, for example,
says that ownership can be transferred by a conveyance. So
there's no question. I'm a copyright owner. I can transfer.
And what it goes on to say is, this will be relevant to sort
of a tertiary issue about what the amendment Number 2 means,
201 says that:
Any of the exclusive rights and any subdivision of
the exclusive rights can be transferred by
conveyance.
So we have a lot of flexibility under the Copyright
Act. We can transfer. If you ever thought there was some
issue about transferring, the 1976 Copyright Act says, no.
It's broadly transferable.
Section 202 says, if I give you a physical object,
that doesn't necessarily mean I gave you any copyright rights
in that physical object. The two are distinct. So we're
going to deal with any ambiguity that might have been lurking
in the law about whether, if I give you a physical object, you
own the copyright rights to that object.
Section 204 says, however, you have all these
rights to transfer, you can transfer in a very open-ended sort
of way, but you have to have a written instrument of
conveyance in order to do so. And what case after case says
is if you don't have a written instrument of conveyance, then
there is no transfer. And federal law, not state law, is the
law that says that that is so.
And our contention here is that there is no written
instrument of conveyance. There's a writing. There's a
contract. We agree that's undisputed. But SCO's argument
reads out of the statute the words of conveyance. And our
point here, our position is that 204(a) says a written
instrument of conveyance, in order to transfer the copyrights,
I need a piece of paper that looks more or less like a deed,
THE COURT: You agree with Mr. Hatch that there's a
writing, but you don't think there's a written instrument of
conveyance.
MR. JACOBS: Precisely. There's a contract, but it
didn't convey ownership.
THE COURT: And because there's not a written instrument
of conveyance, then we have to get to the 204(a) question.
MR. JACOBS: Well, 204(a) tells us that we need to look
to whether there is a written instrument of conveyance before
they get to the first paragraph of their complaint, which is
that SCO, acquired by new SCO -- pause, definitional moment,
I'm going to use SCO interchangeably referred to SCO that
contracted with Novell and the SCO that we're dealing with
today so I don't have to repeatedly say old SCO and new SCO.
So in the very first paragraph of SCO's complaint,
they allege that they obtained ownership under the asset
purchase agreement. We say, how? Where's the instrument of
conveyance? Where's the transfer? We see a promise. We see
an asset purchase agreement that says something will occur,
and then I'll walk you through the asset purchase agreement,
perhaps, if we get to the merits. But we say there is no
written instrument of conveyance.
So our point is if you look at the very first
paragraph of their complaint, you see the federal issue. They
did not say, under Section 204(a) we obtained ownership. But
the cases teach us that they can't plead around that problem.
Contrary to SCO's view on this, there are lots of
ownership cases as to which federal jurisdiction under 1331
and 1338 has been held to lie. Those ownership issues are
ones in which there's a substantial federal question relating
to ownership. What is a widow? What is a work for hire?
What is a joint author? And we submit, and Jasper
demonstrates, has the 204 bridge been crossed?
Paragraph 1 of their complaint again doesn't say,
we crossed the 204(a) bridge, in hac verba. But we submit the
question is there and can't be avoided. You can't hand wave
and say, no, there's a writing so there's no 204(a) issue.
SCO says that 204(a) cases are really about the
distinction between a written agreement and an oral agreement.
And that's not right. The best example of that is the Radio
Television Espanola case --
THE COURT: You say the distinction here is between one
kind of written agreement and perhaps another kind.
MR. JACOBS: Precisely. And it's a sharp distinction in
the law. The Arachnid case is probably the best one to look
at if you really want to see plain as day a context of the
patent, a case where the court is saying, well, no. For this
period, we didn't have an assignment. For this period, we had
a promise.
So that's right. Of course, if there was an oral
issue, we'd have a 204(a) versus an oral promise. But 204(a)
says you have to have a written instrument of conveyance.
Now, SCO says, there is no real law around this,
and that's just not right. 204(a) sets up federal standards
for an instrument of conveyance. The Radio Television
Espanola case says that, and a very good case to look at is
the Pamfiloff case at 794 F Sup 933.
What Pamfiloff says, it's very interesting. What
Pamfiloff says is that 204(a) is so powerful that it displaces
all other bases on which you could argue ownership. Equitable
estoppel, for example. 204(a) displaces equitable estoppel.
So to say there is no law here for a requirement of writing,
that's simply incorrect. 204(a) sets up what might be thought
of as federal common law for the transfer of copyright
ownership.
Is Jasper infinitely elastic? I think that's a
tough question here. Jasper says, is there a substantial
204(a) issue? If so, federal jurisdiction lies. I think we
are still looking at --
THE COURT: What did Jasper mean when it says this is
rare?
MR. JACOBS: There are -- I don't know what it really
means when it says that it is rare because there are a fair
number of ownership cases that turn on federal law and,
therefore, make their way into federal court. What Jasper
literally says is this is the rare contract case in which
there's a 204(a) issue. There the 204(a) issue was trivial
compared to the one here. There the 204(a) issue is whether
-- if some of the co-owners signed the documents after the
purported transfer took place, what does that mean? Does that
mean effective conveyance? And the Court said yes. It didn't
spend a lot of time on the issue. But if you look at the
history of the 204(a) law, it is an issue whether you can have
an after-signed, a later-signed document somehow affects the
transfer of copyright. So it was an issue, and the Court
looked at it and passed on it.
They don't argue that Jasper was incorrectly
decided. And if Jasper wasn't incorrectly decided, then I
don't see how they can credibly argue here there is no federal
jurisdiction.
THE COURT: Well, there was -- I guess Mr. Hatch will
get to reply since this is his motion. But maybe he does
think it was incorrectly decided because he thought the
circuit let it go because it had already been to trial and
they didn't want to disturb it and so on.
MR. JACOBS: Those are the facts of the case. But let's
be clear on whether we are arguing to you that you should not
follow Jasper or not, because that's an important -- that's
really a strong argument to make to you, that you should not
follow Jasper. We say Jasper was correctly decided. But even
if Jasper was kind of out here given the fact that the Court
had to construct its own 204(a) issue to maintain
jurisdiction, we're well inside of Jasper because we're not
asking you to construct the 204(a) issue. We're saying it's
as plain as day, right on the face of the complaint, even
though they don't utter the words 204(a).
So what are the boundaries? We still have a
well-pleaded complaint rule. We contend, however, that the
well-pleaded complaint doesn't allow them to recharacterize
what is an ownership dispute as a slander of title claim, not
mention 204(a) and avoid as plain as day copyright ownership
204(a) issues. They can't do that because the Supreme Court
told us even in the Christensen case that the well-pleaded
complaint doesn't mean that the plaintiff is entirely the
master of his claim. Got a lot of mastery over the claim and
a lot of mastery where the case ends up, but not entirely.
You penetrate into the complaint, and you look at whether
there is a substantial 204(a) issue.
Since copyright law governs ownership transfers and
since this case pleads an ownership transfer, right on its
face, right in the opening paragraph, this complaint
necessarily goes through a proper bridge and through a gate, a
bridge and a gate defined by 204(a). This is not a side
issue. This is not an issue within an issue. This is a
threshold question they don't get anywhere close to making out
their slander additional element if they haven't shown that
ownership occurred. And that's why there's federal
jurisdiction here.
THE COURT: Thank you, Mr. Jacobs.
You get to reply, Mr. Hatch.
MR. HATCH: Thank you.
THE COURT: Slander action does presuppose ownership,
doesn't it?
MR. HATCH: Yes, it does, Your Honor. And I assume
they've raised that as one of their remaining defenses.
What's interesting here is what they're essentially
saying is that this is not an instrument of conveyance, the
APA and the Amendment 2. And a lot of this gets into the
argument that they're also making on the motion to dismiss.
To a large degree, they're putting the cart before the horse,
because they're asking you, and I will argue in that motion,
as well, given an opportunity, that they're asking you to look
at things in a vacuum. I mean, they're really putting
substance ahead of form because it really defies logic to say
this isn't a 204(a) writing. It's a contract -
THE COURT: You meant form ahead of substance.
MR. HATCH: What did I say?
THE COURT: Substance ahead of form.
MR. HATCH: Sorry.
THE COURT: Isn't that what you meant?
MR. HATCH: Yes.
THE COURT: Okay. I just wanted to make sure I
understood you.
MR. HATCH: I'll hear about that back at the office, but
I appreciate that.
No, they truly are, because it really defies one to
be able to say this is not a standard, in a sense a standard
contract that is purporting to transfer copyrights to have a
party pay millions of dollars for it. By asking you to look
at it in a vacuum, they're basically saying, you know, gee,
this isn't it. But we alleged, one, ownership. We alleged,
two, the contract. We alleged it's closed and its pact. And
for eight years the parties have acted as though it is.
One of the exhibits that we attached to the motion
is very interesting because they're saying, well, this isn't
an instrument of conveyance. Well, this is a press release
put out by them. And what did they say about it? Because
you'll recall - well, one of the things you may not be aware
of is when this deal closed in 1996, most of the executives in
that period of time moved on to other endeavors. The
management caused what we are calling the problems today are
all new management with presumably different agendas. And
when they first started making these types of slanderous
comments about the copyright ownership, they pointed only
initially to the APA. The APA has what we consider to be an
error, and it did not reflect the intent of the parties, which
was fixed by Amendment 2, which made it very clear that the
copyrights were transferred.
The CEO of Novell, apparently because he hadn't
been there and he wasn't aware of the transaction and
apparently didn't do his homework before he started making the
comments he was making to the public, basically went out and
said, well, look, we've got the APA, and it doesn't transfer
copyrights. The words aren't in there.
So my client sent him a copy of Amendment 2. And
immediately what he told the public upon receiving that is he
had to make a public statement because he saw that he was
wrong. And he says in a May 28th letter to SCO:
Novell challenged SCO's claims to UNIX patent and
copyright ownership and demanded that SCO
substantiate its allegations that Linux infringed
SCO's property rights. Amendment 2 to the 1995
SCO-Novell asset purchase agreement was sent to
Novell last night by SCO. To Novell's knowledge,
this plan is not present in Novell's payment. The
amount of energy support SCO's claim that certain
copyrights bringing did transfer to SCO in 1992.
So he's even acknowledged that the way they view
the contract is it was - that it was transferred at the time,
the APA was a transferred document.
Now, the cases that Mr. Jacobs cited to you
claiming that there's a lot of law, and I'll point - put to
you that none of them cite Jasper, nobody cites Jasper.
There's only one case that I'm aware of that cites Jasper, and
it sites Jasper for our position, for the good law that it
does quote like when it's quoting Judge Friendly. But most of
the other cases he's talked about are totally different kinds
of cases. They are cases where there wasn't an adequate
right. The writing that was alleged in those cases didn't
make a transfer. That's true. The Radio case, the Arachnid
case. He's saying that Arachnid, it does not rise to the
level of present agreement and existing invention. It doesn't
vest legal title.
Now, we've alleged the exact opposite. We've
alleged that this is the operative agreement and that the deal
closed. And as a matter of fact, he's saying it didn't - in
the motion to dismiss, he makes a lot of arguments that
somehow puts again this agreement out as in a vacuum as though
we can't look at anything else.
I mean, I posed the question to one of the lawyers
in the firm today, you know, what would they go on if we
hadn't even - if we'd never attached the agreement, we just
made the allegations? I don't think we'd be here. I mean,
every piece of evidence isn't attached to a complaint or put
in a complaint. We're in another pleading state.
I just went back today, pulled off a Novell cite.
How did Novell look at this deal? And this is their press
release, and it's still on their sight as of today. You can
get it yourself. Dated November 6, 1995. And it's saying:
Novell states it completed the sale of UnixWare
business to SCO finalizing the agreement first
announced in September of 1995.
That's the APA.
And so it really kind of - it really does stretch
the imagination to be able to try and take what was a
transaction that was treated as a transfer of copyright for
the last eight years and then all of a sudden there was a
dispute between the new management of Novell and SCO, and all
of a sudden, this becomes a federal issue because 204(a)
requires a writing, and they don't think this is enough of a
writing, but didn't have any problem over the last eight
years? I mean, this is the same company that upon the closing
of the agreement, the evidence is going to show, immediately
wrote letters to virtually every one of their clients saying,
we don't own it anymore. Here's contact to SCO. They're who
you have to deal with now.
So I would urge the Court not to look at it in a
vacuum that apparently Novell wants you to to be able to not
look at the reality out there and take it for what it is.
This couldn't be more clear as an instrument of conveyance
even if you want to put it that way.
Thank you, Your Honor.
THE COURT: Thank you.
I'll take the motion under advisement. And since I
don't yet know how I'm going to rule on the motion to remand,
I don't want to bring you all back, I'll now hear arguments on
the motion to dismiss.
Mr. Jacobs? Obviously if I end up remanding, I
wouldn't worry about the motion to dismiss. But if I do
don't, I will.
MR. JACOBS: All right.
Just to set the context, Your Honor, I'm sure
you're aware you have SCO v. IBM.
THE COURT: I am the lucky judge who has that.
MR. JACOBS: You have two of the many SCO cases that are
now filed around the county.
THE COURT: So I've read.
MR. JACOBS: And they're alleging copyright infringement
in SCO v. IBM. So just I want you to have in mind that what
you're doing here may have some bearing on your other case.
I think it would be useful to walk you through the
asset purchase agreement because --
THE COURT: I can solve them both by some ruling here?
MR. JACOBS: Yes. Or at least a lot of both.
I think it would be helpful to walk you through the
asset purchase agreement. I have found that every time I read
it, I get a new insight into the language of the parties. Do
you have a copy of the complaint there with you, the APA?
Because I'm going to --
THE COURT: I think I do someplace here.
Here it is. September 1995?
MR. JACOBS: Indeed. And I will try to make sure that I
can help guide you to the right pages. Not all of them are
enumerated, so there may be a little flipping back and forth.
If you'd like, I did take a copy with some clips that divide
up Amendment Number 2 and a couple portions. Would you like
to use the one you have?
THE COURT: I'd be happy with any help.
MR. JACOBS: May I approach?
THE COURT: Sure.
MR. JACOBS: So I guess I should start out by saying we
wouldn't be here if there was a document that SCO had adduced
or told you they would adduce that says, "Novell, hereby,
transfers the UNIX copyright to SCO." "Seller, hereby,
transfers the UNIX copyright to buyer." They have not adduced
such a writing.
One of the questions that comes up in this case is,
what did SCO get? Or as Mr. Hatch put it, how is it possible
that for the last eight years parties have been surviving
without a copyright dispute arising? SCO attributes it to a
change in management at Novell; we attribute it to a change of
business strategy at SCO, one not contemplated by the original
agreement.
Asset purchase agreement, let's start with the
recitals. This will be important because the term business is
defined there.
Seller is engaged in the business of developing a
line of software products known as UNIX and
UnixWare.
Now let me stop a minute because this gets a little
tricky. UNIX, and particularly UNIX System V Release X or
SVRX. UNIX System V Release X was the unit that Novell itself
acquired from AT&T Unit System Laboratories, or USL, just a
few years before the APA. UnixWare is a derivative of that, a
software program that Novell wrote to try and make UNIX
inter-operate well with NetWare, Novell's flagship product.
When we talked about UNIX, we're talking about
legacy, a legacy program and legacy licenses and a business
that by the time the asset purchase agreement, as I'll show
you, is from the standpoint of Novell and the acquirer here
essentially static.
In B, the recitals go on to say that certain assets
related to the business are going to be acquired. So they're
not going to acquire, quote, the business, unquote; they're
going to acquire certain assets.
And then we get to 1.1(A) down at the bottom of the
first page, and that is the provision of the promise to convey
or the promise to assign, harking back to our distinction
between an actual conveyance or promise to convey, this is a
promise to convey.
At closing date, the seller will convey, et cetera,
the included assets - and if you read across to the next page
stating rather the obvious, they're not going to transfer the
excluded assets. We're going to transfer the included assets.
We're not going to transfer the excluded assets.
Now, we noted in our opening paper, and SCO did not
respond to this point, that there is a document - there is a
closing that takes place, and there's documents in any big
transaction like this at a closing.
THE COURT: When you say the opening papers, you mean on
the motion to dismiss.
MR. JACOBS: Correct. One of the earlier footnotes.
So something happens at the closing, and what
happens at the closing is the included assets get transferred,
the excluded assets don't.
So now to flip ahead to, I believe, it is the black
clip.
THE COURT: Schedule 1.1(A)?
MR. JACOBS: Exactly. And this is - the Schedule 1.1(A)
and 1.1(B) are the schedules referred to in that provision
right there I just pointed you to. And the first line is the
line that SCO points to:
All rights and ownership of UNIX and UnixWare.
And that sounds pretty broad. All rights in UNIX
and UnixWare. And they like that language.
Now, if you go to the next page, the page marked
Page 34, we're still in the included assets. We're still in
Schedule 1.1(A). And if you go down to Roman V, there's a
heading there for intellectual properties. So we're still in
the included assets. What intellectual property is being
conveyed to SCO in this agreement? And the answer is a couple
trademarks. No copyrights are shown. No patents are shown.
Just a couple trademarks.
Now, if you flip ahead to the excluded assets list,
Schedule 1.1(B), you'll see a Roman V there, kind of a
parallel provision, right? Intellectual excluded assets.
All copyrights and trademarks except for the
trademark UNIX and UnixWare.
So we have a mirror image provisions here, the
excluded assets, included only - when it comes to IT, it
included UNIX and UnixWare. The excluded assets include
everything. You see all the patents there, of course, except
for the trademark UNIX and UnixWare. So as of the closing,
we're plainly not transferring copyrights, and I don't think
there's any serious dispute about that.
What, then, does SCO get out of this? If they
don't get the copyrights, what do they get? And I want to
turn you now to Article 4 of the agreement, because this is
where a lot of the interesting provisions of this agreement
come in, and particularly Section 4.16.
So this is the heading SVRX licenses. And as I
mentioned, SVRX refers to the legacy business, UNIX System V,
SV, Release X, X standing for any numeral. And it's
important, first of all, in 4.16(A) to see what SCO doesn't
get with respect to UNIX System V Release X, because in
4.16(A), what SCO has with respect to those rights is the
right to administer those legacy licenses remitting 95 percent
to Novell and keeping 5 percent for it.
So right away you start to wonder, well, why would
SCO need the copyright rights, any of the copyright rights in
UNIX System V Release X. And maybe most fundamentally, why
would they need any ownership of UNIX System V Release X in
order to carry on that business of administering the licenses
remitting 95 percent to Novell? The answer is, they don't.
They don't need the copyrights to do that. They're just
administering licenses.
Now, as I mentioned, by this time the SVRX business
is largely static. And if you look down at 4.16(C), it says
that seller, that's Novell, is not going to promote the SVRX
business. And then if you look up a sentence at the bottom of
4.16(B), it says the buyer is not going to make new sales of
SVRX without Novell's permission. That gets amended slightly
by amendment Number 1, not at issue here. They get the right
to make some additional licenses to additional computers for
already existing licenses.
So when we look at what the agreement does with
respect to UNIX System V Release X, which is the UNIX that is
at issue in the slander title claim, what we see is that SCO
has no reason to have a copyright.
What did they get? Well, what they get, if you go
ahead to 4.18, is a provision that says development of a
merged product. And it says in the second sentence:
Buyer is going to commercial use with commercially
reasonable efforts to complete the merged product.
The merged product was basically what this deal was
about from Novell's standpoint. What SCO was going to do was
enhance some additional kinds of UNIX, some additional UNIX
flavors for special kinds of processors or non-special
processors, but evolve the UNIX business, evolve UnixWare in
particular, and that's the reference there to the merged
product.
And if you look even further ahead of the
agreement, I won't ask you to jump there now, but it shows
that far from remitting 95 percent of the SVRX to Novell. As
to this merged product, where it calls for other products that
are named in there, there's Eiger and White Box and
computeristic terms, as to those products, there's a step down
in royalties.
Here's the interesting question. We alluded to it
in our reply brief. What ownership of copyrights falls out of
this arrangement?
Because SCO is developing enhancements, is writing
its own code, SCO does as a matter of copyright law own the
copyright rights and the rights to enforce the copyright
rights in the code that it developed. There is no so-called
grant back provision in this agreement itself. There is
another agreement that's referred to here which does have a
licenses back to Novell. It's not at issue today. But the
point is, in terms of copyright ownership, it's not correct to
say they didn't get any copyright ownership. As a matter of
copyright law and how copyright law treats derivative works,
they own the code that they wrote. The code that they are
merely taking from Novell and incorporating that product they
don't own, and they have no need to own.
And that's why even if you look at the required for
language in Amendment Number 2, you come up against a very -
you come up against a stonewall when you start talking about
UNIX System V Release X. There is no reason under the
structure and logic of the asset purchase agreement for SCO to
have acquired ownership rights of anything in System V Release
X, because that wasn't what they were supposed to be out
focusing on in any way.
So Amendment Number 2 gets executed, and that is
the green clip. And Amendment Number 2 adjusts the definition
of excluded assets. Now, this is the kind of quirky way to
begin with to try to effect a change in the structure and
logic of the agreement to only modify the excluded assets, do
away with the included assets.
But in any case, having sat down and thought about
it a little bit, what did the parties do? Did they purport to
write an amendment that transferred all intellectual property
rights in UNIX to SCO? Did they purport to transfer all of
the intellectual property rights that are listed in a later
exhibit in the agreement to SCO? They didn't do that. Did
they say, all intellectual property rights relate to the
business, which would have been kind of interesting because
they talked about - they defined the business. There's even,
just to underline the point, there is even a definition of
seller intellectual property rights in the asset purchase
agreement at Section 2.10. Did they say, we are going to
transfer seller intellectual property rights from seller to
buyer? They didn't do that.
They said something very narrow and very limited.
All copyrights and trademarks - so actually to start out with,
a very interesting point. We retain the exclusion for all
copyrights and trademarks. We don't wipe it away. We say,
all copyrights and trademarks except for the copyrights and
trademarks owned by Novell as of the date of the agreement
required for SCO to exercise its rights with respect to the
acquisition of UNIX and UnixWare technology.
None of us were present in that negotiation.
Section 204(A) says it doesn't matter. You look to the plain
language if the document, and you have to cross over that
204(a) bridge, and you have to see a conveyance. You have to
see an assignment. You have to see something that says
something along the lines of, seller hereby conveys to buyer.
But even if you start penetrating this language,
you see why SCO's claim just cannot survive a motion to
dismiss, because under 204(a), we should know what copyright
rights went to SCO. And as I mentioned when I discussed the
structure and logic of the Copyright Act, it's not just what
rights and what programs or what rights and what manuals, but
Section 201 makes it clear that you can transfer any one or
more of the exclusive rights volume within copyright. The
right to reproduce, the right to distribute, the right to
publicly perform. And then even in that you can convey
sub-divisible rights.
So we should know - from the face of the document,
we should have a guidepost that says the cases, what programs,
what exclusive rights, can't assume that it's all exclusive
rights, here especially since it says required for. And
that's why this is - this Amendment Number 2, amendment to the
APA fails two tests under the law of 204(A). One, is it an
instrument of conveyance? Meaning that it had the effect of
conveying a present interest in an item of property; and, two,
is it close enough so that we're not left completely guessing
as to what copyright rights might have - might, in fact, have
transferred to Novell - from Novell to SCO, assuming that this
was such an instrument of conveyance?
But their slander of title claim depends on their
ability to show that a transfer of ownership occurred because,
as Mr. Hatch noted, they have attached these documents to
their complaint. These are their documents. They haven't
told you how they might amend. They haven't told you what
they might show by way of additional written instruments of
conveyance.
We submit that you should dismiss this complaint.
And if they want to try and change your mind later with some
additional evidence, they will have to file a relevant motion.
I just want to note two - one housekeeping item.
The cases we cite on 204(a) and on jurisdiction refer to 1338,
and the issue of jurisdiction should be considered as a 1338
issue. And secondly, on the - you've dealt with this issue of
special damages. I think you're the expert of special damages
under Utah law. And your decision on that was affirmed.
They have plead special damages with serious
particularity, and they have to prove - they can't just plead
attorney's fees in this action as the basis for their special
damages. You decided that in the Computerized Thermal Imaging
case. It was affirmed by the 10th circuit. So on the issue
of special damages, I think that is a really fairly clear
question of law.
THE COURT: Thank you, Mr. Jacobs.
Mr. Hatch?
MR. HATCH: You know, Your Honor, I think, and I hope I
get it right this time, I think he's putting the cart before
the horse. How's that?
As I sat and listened to Mr. Jacobs, I think this
would all -- it would all be good and well if he were making
those types of arguments, you know, several months from now,
particularly as he's trying to go through the contract and
tell you what he thinks it means, after we've had the
discovery and we've talked to the people who are involved, we
have all the documents out there.
We have to remember, this is a motion to dismiss.
We're talking about the pleading, not all the documents out
there. And to be honest with you, as you can probably well
guess, I have rather divergent views of the documents as to
what they say and what Mr. Jacobs says.
One of the things he does tell you, I think he
started his argument by saying this, and I think it says
volumes, he said every time I read the APA, I get something
new and different. And, you know, we ought not to be sitting
here on a motion to dismiss when the only thing before this
Court is a complaint and having Mr. Jacobs, who apparently
gets different readings every time he reads it, telling us
what this contract means.
The reality is all we're here to decide today is
whether or not we sufficiently pled in the pleading the
statute of slander of title claims and whether we can go
forward. And he is trying to put his defense that somehow he
thinks the contract, he may be able to show that it means
something different than we say it is, he wants to do that
now. He wants you to decide that issue now, without the
benefit of all the documents, all the correspondence, the
witnesses that are involved in this, and frankly without a
real knowledge of the contract. You know, he's gone up and
made representations that were really quite amazing, because
the contract itself, as he tried to show it to you, he asked a
very interesting question. He pointed out that part of this
was - the duty was SCO was to administer current licenses and
remit a percentage back to Novell. And that doesn't - why
would that require any copyright?
Well, okay. That's really wonderful and probably
true. But, you know, a lot of money was paid for this, and
not enough money that could be justified from just that part
of the contract. He leaves out the entire rest of the
contract including from the list of assets where the source
code is being transferred to SCO. And it's with the source
code that we have the ability to use that source code, to
develop new products under the source code, new licenses and
to be able to take the business forward. That is worth
something. In the source code without a copyright isn't worth
anything. And if we don't decide it's a vacuum today on a
motion to dismiss and go forward, I think Mr. Jacobs knows
very well just as he really - well, he knows that we're going
to find several things. We're going to find that Novell
transferred copyrights to us at the time of closing. Well,
why did they do that if his reading is correct?
One of the documents - and this is a motion to
dismiss, but I think it's only fair for the Court to see the
kind of things we're going to need to be looking at as we go
forward. One of the documents that is dated December 6, 1995,
now that's the date of closing. That's a date where they're
claiming no transfer was made. It is a technology licensing
agreement between Novell and SCO. And essentially what it
does is it gives Novell a license back of the copyrights and
all the rights and everything it just sold to SCO for it's own
use.
Well, if this were a summary judgment motion, we'd
be asking serious of questions of, if you're saying copyrights
weren't transferred, why did you feel like you needed to get a
license back so that you could use these in your own business?
Because if you owned them, guess what, this document doesn't
exist. And that's kind of why he wants you to decide this on
a motion to dismiss and impact, you know, the other case you
have and impact this case without any information, because
well, that would be a really great victory.
But it really goes contrary to the law of the
motion to dismiss. We're here. Our only concern here is
whether or not it was pled sufficiently and, therefore, put on
notice of their claims so we can go forward and resolve the
dispute, which is a state law claim on whether or not they've
slandered our title, which we allege they have; and , two,
whether their defense, which seems to be created not back in
1995 when this thing was closed or even '96 when the
clarification of the Amendment 2 was put into place, but just
a few, not more than a few months ago when the new management
started to take positions that, you know, we frankly believe
were taken to affect the IBM litigation.
THE COURT: What is your response to Mr. Jacobs'
argument that you haven't sufficiently pled special damages
and that you have not met the brilliant test for them outlined
in Thermal Energy?
MR. HATCH: I would say that, Your Honor, if we haven't
met it as well as you would expect, my most profound
apologies, because I wouldn't challenge that ruling at all.
What I would say, again, we're in the notice of pleading
stage, and it's very - we have alleged, and I'm always - I'm
always willing to say we could have alleged better. I think
anybody who takes a second grasp of something can always write
something better. But I think it is sufficient.
They are on knowledge that based on what they did
that they know that people - they know the intent of the
people - there are people out there and businesses who will
not take licenses with us now because thay have raised an
issue whether or not we own the copyright or not. That's a
damage, and that's a type of damage that you talk about in
that position - I mean that opinion in its typed form, not the
exact. They know that people won't invest with the company
because there's a question mark out there that they caused.
And, frankly, we're having, you know, we're having impact
that's not monetary, as well, because people were citing to
this case and other cases saying, we ought to state them,
ought to go forward where we can protect their rights because
they want to see if they can actually make their case that we
don't own the copyright.
So those are all pled generally. Could we be more
specific? Always. Could we be more specific in six months
when we have more discovery? Probably. But I don't think the
Notice Pleading Statute requires that. If there was no
possibility that we had any type of special damages under the
claim, then I would say there's a problem. But I would say
it's pretty obvious, and they know it, that there are claims
for damages out there, and having us put another paragraph in
the complaint would really -- it could be done, but it's
really kind of a waste of time and manpower. The case ought
to move forward. And, frankly, even if there had only been a
monetary damage, the fact that we had to expend attorney's
fees to protect our rights is a legitimate damage under the
case law, as well.
The only other point I would make, and it goes
really to the same point that I was making about, you know,
really what Novell was trying to argue here is a motion to
dismiss is their interpretation of the contract. I heard
Mr. Jacobs talk about, you know, you have main parts and
subparts and got into a rather quite complexity that he claims
the law of 204(A) requires. I would put to you and I have yet
to see the case that requires all of that.
Judge Kazinski was very clear in his decision in
the Ninth Circuit, a juris that I personally have respect for,
bright man. He stated the same thing that Judge Friendly
stated and Judge Newman before stated, virtually every judge
that addressed it, it needs to be a wriiting. And, he says,
it does not need to be the Magna Charta. And the reallity is
here, there isn't a lot of detail in the contract.
But one of the things that they're trying to attach
their interpretation to this is, is we will show at trial if
they bring summary judgment, at summary judgment, that what
was being transferred here was everything that was UNIX and
UnixWare. And the only - and it doesn't take a lot of
language to say, everything is being transferred.
And Novell knew that. And we believe that not only
will the SCO side of that contract testify that we were buying
everything in UNIX and UnixWare, which doesn't take a
delineation, but that the Novell people are going to testify
to that, too, because that's what the deal was. And so we
have every belief that they will be consistent with that
testimony.
Now, one of the things that he doesn't point out,
it's hard to define this. But you'll notice in the excluded
assets, the reason it even makes any limitation at all is
because Novell at the time was concerned that one thing didn't
get transferred over, and that was their NetWare product. And
that's why it's worded. It goes all the way down the list.
You don't get NetWare. You don't get NetWare this, and you
don't get NetWare that. And when it talks about you don't get
copyrights in 1.1(A), it's talking about we're not getting the
NetWare copyrights.
Now, all of this is going to be made clear
throughout the couse of this litigation, and it would be truly
unfortunate if a motion to dismiss based on a lawyer's
argument that he gets a different reading every time he reads
it, we throw the entire case out. That doesn't make sense.
And I think they understand the pleadings under the
Notice of Pleadings standard. And I really wouldn't - could
the pleading be made better? Maybe. But it wouldn't - would
their knowledge of what they're defending be any better
because of it being written slightly better? I don't think
so, and I think we ought to move on.
Thank you, your Honor.
THE COURT: Thank you, Mr. Hatch.
Mr. Jacobs?
MR. JACOBS: Briefly, Your Honor.
We read Section 204(a) as saying that SCO doesn't
get to get to the jury. The policy behind the 204(a) is there
should be clarity in instrument of assignment so that both
parties and the world can trace title. We don't have a deed
system, although you can record assignments in the copyright
office. We don't have the kind of elaborate system of land
title that we have in this country to make sure -- to ensure
certainty. And, of course, there are disputes that arise out
of the real property deeds. But you have to start out with a
deed. You have to start out with an instrument of conveyance.
I'm studying the assets purchase agreement to
answer the question, what did SCO get? I started out by
saying we wouldn't be here if SCO could point to an instrument
of conveyance.
They haven't pointed to an instrument of
conveyance. They haven't pointed to a document in which
Novell conveyed ownership of copyrights to seller - when
seller conveyed ownership of copyrights to buyer, when Novell
to SCO. If they had that piece of paper in front of you,
could there be interpretive issues? Perhaps. If they did it
right? No. But could there be interpretive issues? Perhaps.
But at least we would know that there was some actual
conveyance of something to something, and they haven't even
gone that far.
So by suggesting to you that what they really need
to do is take discovery and get to the jury, we propose to you
that they're really making our argument. They're making our
204(a) policy argument. They're making our 204(a) case law
argument.
The instrument of conveyance is supposed to serve
as the guidepost. It's supposed to be sufficiently clear that
the world and the parties know that the buyer is actually
negotiated. One of the cases says that the purpose of 204(a)
is to ensure buyers negotiate specifically with sellers over
what copyrights are being transferred. And if you stretch
that law very far and you allow people to say, let me get to
the jury and let me introduce evidence from a former executive
that now works for us, then you undermine the policy behind
204(a). You undermine the entire federal scheme. That's why
you should dismiss their complaint.
THE COURT: Thank you.
Thank you all. I'll take this motion under
advisement and reach it if I don't remand the case.
Court will be in recess.
(Whereupon, the court proceedings were concluded.)
* * * * *
STATE OF UTAH )
) ss.
COUNTY OF SALT LAKE )
I, KELLY BROWN HICKEN, do hereby certify that I am
a certified court reporter for the State of Utah;
That as such reporter, I attended the hearing of
the foregoing matter on May 11, 2004, and thereat reported in
Stenotype all of the testimony and proceedings had, and caused
said notes to be transcribed into typewriting; and the
foregoing pages number from 3 through 45 constitute a full,
true and correct report of the same.
That I am not of kin to any of the parties and have
no interest in the outcome of the matter;
And hereby set my hand and seal, this 24th day of
June 2004.
[signed Kelly Brown Hicken]
-------------------------------------
KELLY BROWN HICKEN, CSR, RPR, RMR
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This is the ASCII transcription posted at scofacts.org.]